Was electricity passed through by a commercial landlord taxable as rent?

Subject

Pass Through Charges for Electric Utilities

Plain-English summary

The landlord's electricity pass-through was not taxable rent when the landlord had already paid sales tax to the utility and billed the tenant separately at the same or a lower price. Monthly estimated operating-expense installments followed by a year-end actual-cost reconciliation were sufficiently separate under the lease.

Calling the charge "Additional Rent" did not change that result. But any markup or administrative charge above the landlord's electricity cost was taxable as rent and was also subject to the 2.5% gross receipts tax identified in the advisement.

The Department limited this treatment to previously taxed electricity. Other pass-through charges, including common-area maintenance and insurance denominated as rent and required for occupancy, remained taxable rental consideration.

For tax collected in error, the tenant had to receive a refund from the landlord first. The landlord could then seek a Department refund or take a credit within 36 months, supported by proof of utility tax paid, tax collected and remitted from the tenant, and the refund to the tenant.

What this means for you

Commercial landlords should separate at-cost electricity reimbursements from rent and other operating expenses, avoid markups if claiming this treatment, and preserve utility bills, invoices, payment records, tax returns, and customer-refund evidence.

Common questions

Did the lease label control? No. The charge could remain nontaxable even when the lease called it rent.

Was an electricity markup exempt? No. The excess and any administrative charge were taxable rent; the advisement also applied gross receipts tax to the markup.

Did the rule extend to common-area maintenance or insurance? No. The Department expressly kept those mandatory pass-through charges within taxable rent.

Who refunded tax paid in error? The landlord refunded the tenant first, then claimed a refund or credit from the Department with supporting records.

Citations and references

• Fla. Stat. §§ 212.031(1)(c), 203.01, 213.35, and 213.22
• Fla. Admin. Code r. 12A-1.014(1), (3), (4), (6), and (7)
• Omni International of Miami, Ltd. v. Department of Banking and Finance, 444 So. 2d 540 (Fla. 3d DCA 1984)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94A-066

Original ruling text

Dec 15, 1994

Re: Technical Assistance Advisement 94(A)-066
Sales and Use Tax - Pass Through Charges for Electric
Utilities
Section 212.031, F.S.
Rule 12A-1.014, F.A.C.
Parties: XXXXX (herein the "Tenant")
XXXX (herein the "Landlord")

Dear :

This response is in reply to your October 7, 1994, petition for
the Department's issuance of a Technical Assistance Advisement
("TAA") pursuant to s. 213.22, F.S. Your petition regards the
referenced matter and parties. The Department has carefully
examined your petition and finds it to meet the criteria set
forth in Chapter 12-11, F.A.C., requisite to issuance of a TAA.
Therefore, the Department is hereby issuing the requested TAA.

DISCUSSION OF FACTS

Your request imparts the following information pertaining to the
matter under advisement herein:

"Pursuant to previous correspondence received from the
Department of Revenue (i[.]e. letter dated August 26, 1994,
included herein) this letter is a request for an official
Technical Assistance Advisement in order to obtain the
state[']s clarification of TAA 90A-069 (November 1990)
relative to sales tax on electricity. Specifically, please
provide a written response regarding whether sales tax
should be assessed on the electricity portion of annual
operating expenses as they are billed to the tenant on a
proportionate share basis.

"Enclosed is a copy of a lease for office space executed by
the [Tenant] as well as a reconciliation statement

identifying the various operating expenses passed through
to the [Tenant]. The actual electricity expense incurred by
the building is identified without mark up' and it ismeasured at the landlord's master meter'. Based on TAA
90A-69 and the information contained therein, it is our
understanding that sales tax should not be assessed on the
electricity portion of the operating expenses billed
annually to tenants occupying the property. Therefore, we
have applied for sales tax credits with the [Landlord] for
the [Tenant's] proportionate share paid in error based on
the `Revised Billing', also included herein.

Careful examination was made of the Lease Agreement (the
"Lease") submitted for analysis. Article 2.2 of the Lease,
entitled "TENANT'S Share of Basic Operating Expenses.", provides
in part the following terms and conditions relevant to the issue
under advisement herein:

"TENANT shall pay to LANDLORD as Additional Rent hereunder
the TENANT'S proportionate share of Basic Operating
Expenses as determined below plus applicable sales tax
thereon.

"(a) The term Basic Operating Expenses' shall mean the
operating expenses of the Property and all expenditures by
LANDLORD to maintain the Property and such additional
facilities in subsequent years as may be determined by
Landlord to be necessary in accordance with sound and
reasonable practices for facilities of a like kind and
character. All operating expenses shall be determined on a
cash basis in accordance with generally accepted accounting
principles which shall be consistently applied. Such
operating expenses shall include all expenses, costs and
disbursements of every kind and nature which LANDLORD shall
pay or become obligated to pay because of or in connection
with the ownership, operation and maintenance of the
Property, including, but not limited to, the following:....
"(3) Cost of all utilities for the Property, including cost
of electricity, water, lighting, hearing, air conditioning
and ventilating....
"(c) TENANT shall pay TENANT'S Proportionate Share of the

total annual Basic Operating Expenses incurred by Landlord
during each calendar year...."

REQUESTED ADVISEMENT

Specifically, you endeavor to receive the Department's advice
regarding the following:

"Please confirm that sales tax should not be assessed on
the electricity portion of `Additional Rent'. Also, please
provide the procedures and any information necessary for
the [Landlord] to submit their request for refund or credit
of the sales tax paid from the state."

DISCUSSION OF LAW

The court in Omni International of Miami, Ltd. v. Department of
Banking and Finance, 444 So.2d 540 (Fla. 3 DCA 1984), considered
a fact pattern wherein:

"[The lessor] had twice paid sales taxes on the consumption
by its tenants of electricity received through a single
master meter; first, when it itself paid those amounts
after being billed by the power company, and again when it
transmitted the same taxes after being reimbursed by the
tenants."

The court affirmed the hearing officer's findings that the
landlord did not collect double tax from its tenants, but rather
had twice paid sales taxes on consumption by its tenants of
electricity passed through a single master meter.

In application of the Omni decision, the Department takes the
position, in the instance where commercial premises are served
by a single or master meter and the proportionate cost of the
electricity paid by the lessor, and upon which the lessor has
paid sales tax, is passed through to a tenant, and the lessor is
simply reimbursed by the tenant for its actual electrical
consumption, that such electricity billed the tenant is not a
taxable element of the payment for renting, leasing, letting, or
granting a license to use real property. Thus, in such

instance, the electricity costs borne by the tenant shall not be
included within the taxable total rent or license fee charged
for the occupancy or use of real property as provided in s.
212.031(1)(c), Florida Statutes. This position will be held
irrespective whether the lease or license agreement designates
such proportionate electricity costs billed the tenant as part
of the rent or license fee.

With respect to the refund or credit of tax paid in error, Rule
12A-1.014, F.A.C., provides in relevant part the following:

"(1) All dealers who are covered by the provisions of the
sales and use tax law must keep records, as provided in s.
213.35, F.S., as created by section 6, Chapter 88-119, Laws
of Florida....
"(3) Any dealer who makes taxable sales to nontaxable
persons, or refunds taxes paid to any purchaser, or pays
any tax in error for which he later claims a refund or
credit shall keep internal records to support such sales.
"(4)(a) When any dealer refunds the tax paid by a
purchaser, the Department of Revenue will refund such tax
if application therefor is made in writing within 36 months
from the date of payment of the tax to the state. The
application for refund must state in clear and convincing
terms the grounds for refund.
"(b) Any dealer who is entitled to a refund of taxes paid
to the Department of Revenue may, in lieu of applying to
the Department for a refund, take credit for such amount on
any subsequent report filed within 36 months of the date on
which the dealer remitted the tax to the state. Such
credits must be supported by schedules attached to the tax
report and if, in the discretion of the Department, said
credit is improperly taken, it may be disallowed by the
Department within thirty-six (36) months of the date on
which such credit is taken by the dealer....
"(6) Whenever a dealer credits a customer with tax on
returned merchandise or for tax erroneously collected, he
must refund such tax to his customer before his claim to
the State for credit or refund will be approved.
"(7) A taxpayer who has overpaid tax to a dealer, or who
has paid tax to a dealer when no tax is due, must secure a

refund of the tax from the dealer and not from the
Department of Revenue...."

CONCLUSIONS OF LAW

The undersigned does hereby affirm that the Department's
interpretation and application of the Omni decision to the
instant facts as represented does yield a finding that the
electric utility charges which are billed to the Tenant by the
Landlord are not subject to sales tax provided that: (i) the
landlord has paid sales tax to the utility provider on the
electricity; and (ii) the utilities billed by the Landlord to
the tenant are separately stated on the Landlord's invoice to
the Tenant at the same or lower price as that billed by the
utility company to the landlord. The Department considers the
procedure and methodology embodied in the Lease, whereby the
operating expenses (including electric utilities) are paid by
the tenant to the landlord in monthly installments based on an
estimate and reconciled at year end based on actual cost, to
sufficiently satisfy the requirement to separately state the
pass through charge for electric utilities. The exempt character
of the pass through charge for electric utilities is not lost as
a result of the denomination of such charge as rent by the terms
of the Lease. However, you are alerted to the fact that in the
event the electric utilities are marked up on the pass through,
then the residual amount of charge to the Corporation in excess
of the landlord's cost for such electric utilities is subject to
tax as rent. This includes any amount designated as an
administrative charge on the pass through of the electric
utilities. Moreover, the amount of any mark up of the electric
utilities would also be subject to gross receipts tax at the
rate of 2.5% pursuant to s. 203.01, F.S.

We further point out that the Department has not adopted a
position of expanding the scope of the Omni decision to embrace
any other pass through charges such as common area maintenance,
insurance, etc. In short, the scope of Omni has been confined
to the single issue at bar, sales tax on the pass through of
utilities (previously taxed). Therefore, the various other pass
through charges which are denominated by the Lease as "rent",
the nonpayment of which constitutes a default under the terms

and conditions of the Lease, are taxable as mandatory rental
consideration payable as a condition of occupying the premises.

Regarding the procedure to be followed by the Landlord in
obtaining a refund of or taking credit for the sales tax it
refunds to the Tenant on the pass through of electric utility
charges, the provisions of Rule 12A-1.014, F.A.C., above, must
be complied with. As provided in subsection (7) of the rule, the
Tenant must secure the refund from the Landlord, not the
Department. As provided in subsection (6) of the rule, the
Landlord must refund the tax to the tenant as a prerequisite of
claiming a refund or credit of the tax. Lastly, as provided in
subsection (4)(a) and (b) of the rule, the Landlord must claim
the refund or credit within 36 months of remitting the tax to
the state in order to fall within the three year statute of
limitations. The method for claiming a refund is for the
Landlord to complete an Application for Refund (Form DR-26) and
to submit said form to the Department together with supporting
documentation. The supporting documentation should include: (i)
proof that the Landlord paid tax to the Utility Company on the
electric utilities; (ii) proof that the Landlord collected tax
from the Tenant on the pass through of the electric utilities
and remitted said tax to the Department; and (iii) proof that
the Landlord refunded the tax to the Tenant on the pass through
charge for electric utilities. The method for taking credit is
for the Landlord to include the amount of credit on line 6
(Refunds and Lawful Deductions) of its Sales and Use Tax Return
(Form DR-15). The amount of credit cannot exceed the tax
liability reported on the return. Residual credit may be carry
forward and utilized in a succeeding month so long as the month
is within the 36 month statute of limitations. The return must
be supported by schedules showing the same information described
in items (i) through (iii), above. The Landlord's records must
contain documentary evidence (i.e., utility bills, cancelled
checks, sales tax returns, etc.) proving such items.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized

above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to a different treatment than
expressed in this response.

You are further advised that this response and your request are
public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of s. 213.22, F.S.
Your name, address, and any other details which might lead to
identification of the taxpayer must be deleted by the Department
before disclosure. In an effort to protect confidential
information, we request you notify the undersigned in writing
within 15 days of any deletions you wish made to the request or
this response.

Sincerely,

Daniel M. Wagner, Jr.
Tax Law Specialist

DW/
Control No. 17959